Cold weather drives a hot natural gas trend--until it doesn't

Natural gas futures continued to move higher as an Arctic vortex delivered cold, colder, and coldest air to the United States.

But hedge funds have apparently decided that this is as cold as it gets. Net long positions—bets on future rising prices—fell by 3% in the seven days ended on December 31, according to the U.S. Commodity Futures Trading Commission. Long positions have a lot of room to retreat since they were at a six-month high.

Spot natural gas prices hit a record yesterday in New York and climbed to 10-year highs in other East Coast hubs. Natural gas for February delivery rose climbed to $4.349 per million BTUs (British thermal units.) The futures are up 33% year over year and 23% from November 1 on expectations that cold weather will bring rising demand for natural gas. About 49% of U.S. homes use natural gas for heat.

The longer-term picture for natural gas, though, shows continuing growth in U.S. production. The Energy Information Administration projects that U.S. production will climb to 71.66 billion cubic feet a day in 2014. That would be a 2.1% increase from 2013 and is an increase from the 71.43 billion cubic feet the EIA projected in its prior report. I think it will take something more than cold weather—like the beginning of U.S. exports of liquefied natural gas in 2015 (which is why I have Cheniere Energy (LNG) as a Jubak’s Picks http://jubakpicks.com/ )—to push natural gas prices higher from here on a sustained basis.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Cheniere Energy as of the end of December. For a full list of the stocks in the fund see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.